May, 2010

A new law, Senate Bill 1375, signed by Arizona Governor Jan Brewer on May 11, 2010, adds requirements for timely payment of retainage and final payments to the state’s prompt payment statute for non-public construction. The law establishes a payment cycle according to which construction owners will have to promptly pay retainage and final payments for properly completed construction services and materials, or else pay a penalty of 1.5-percent interest per month.

The law, which applies to projects for which contracts, plans or specifications are distributed on or after Jan. 1, 2011, will require prime contractors to submit timely applications for payment according to the project’s billing cycle (normally 30 days). Unless disclosed and stated otherwise in the construction plans, project owners will have to approve within 14 days, and pay within 7 days after that, proper invoices for release of retainage submitted upon at Substantial Completion. After Substantial Completion, owners may only withhold a maximum of 150 percent of the reasonable costs to complete any work that is not complete or is under dispute. The law will also establish a 21-day cycle for project owners to pay prime contractors’ proper invoices for final payment.

Prime contractors and subcontractors will have seven days from receipt of retainage and final payment to pay their subcontractors and material suppliers. The law will entitle subcontractors to written notifications of payments from owners. Also, it will specifically protect subcontractors from wrongful withholding for defective work or materials when they are not at fault.

Bill Details

The Stoncreek “Fix” The Owner’s Stonecreek "fix" language essentially issues from the replacement of the word "item" which describes a portion of a billing to which an owner may object with the word "reason". [32-1120.01(D) and (E) page 3-4] Note: Page numbers refer to the PDF version of the House Engrossed Bill.

The Stonecreek court ruled the word "item" restricted an owners' right to withhold payment to the items listed in the current billing or invoice and prohibited the owner from withholding for an item that did not appear on the billing. The word "reason" which now replaces “item” is intended to eliminate the restriction and permit the owner to withhold payment for any permitted reason listed in 32-1129.01(D) (1) through (8).

Benefits for Subcontractors and Contractors in SB1375

The early release of all Retention [page 2 lines 37-40]; at Substantial Completion defined as beneficial use by owner or Temporary Certificate of Occupancy [page 1 lines 37-45]; page 2, lines 1-14 a definition of Final Completion at earliest of contract completion or final inspection [page 1 lines15-21]; the final payment due to Contractor within seven days after billing for Final Payment is approved [page 2 lines 41-43]; the statutory requirement for contractor to submit timely application for payment to owner [page 2 line 23-33]; a good system for managing punch list billing after Substantial Completion through final completion allowing owner to hold only 150% of reasonable cost to complete [page 5 lines 27-43 and page 6 lines 19-33]; subcontractors' right to know when payments are made by owner to contractor extends through entire project once requested [page 7 line 23-24]; disclosure, owners' opt-out of Substantial Completion and Final Completion definitions, terms and time requirements must be in contract and disclosed by legend on each page of all drawings including bid plans [page 7 lines 34-44 and page 8 lines 1-28]; This means the contractors and subcontractors will know any altered terms of substantial completion and final completion payments before they bid; payment entitlement rights for contractors and subcontractors expanded to "Article" [page 8 line 34]; clarified entitlement/pay if paid; clarifies limitation of retention to the owner's actual withholding only [page 9 lines 38-44]; contractor and subcontractors are required to timely disclose their intent to withhold certification on an application for payment [page 10 lines 1-8], new disclosure requirement; contractor is required to timely disclose to all subcontractors any written reason owner provides to support a withholding of payment for reasons [page 10 line 9-22], new transparency; contractor is required to pay not-at-fault subcontractors when owner withholds for defective construction work or materials not remedied and owner payment is insufficient to fully fund contractor's application [page 10 lines 23-35]; new date certain payment provision and significant advance on "pay-if-paid" against public policy; mediation and arbitration separated from litigation venue to overcome potential problems with the Federal Arbitration Act; and automatic opt-out for owners of owner-occupied dwellings unless contractors provide proper notice in each billing or estimate from contractor to owner-occupant. This provision is intended to protect homeowners from bad contractors and also protect the reputation and payment rights of good contractors.